Aug. 3 (Bloomberg) -- The Australian dollar fell for the first day in a week on speculation a narrowing government bond- yield advantage over U.S. fixed-income securities will spur sales of the currency.

Australian yields have not kept pace with increases in those of U.S. Treasuries, narrowing the gap in two-year maturities to the least in almost four years on July 29. The central bank today held interest rates unchanged for a fifth month. U.S. rates may rise next week.

``I'm running out of reasons to buy the Australian dollar,'' said Sean Callow, a currency strategist at Westpac Banking Corp. in New York. ``If you're going to hold the Australian dollar over the U.S., it always needs to have an attractive yield differential.''

The Australian dollar dropped to 76.41 U.S. cents at 4:45 p.m. in Sydney from 76.48 cents in late Asian trading yesterday. It will weaken to 72 cents by year-end, Callow said.

The Reserve Bank of Australia kept its target rate for overnight loans between banks at 5.5 percent today, as predicted by 22 economists surveyed by Bloomberg News. All but two see borrowing costs unchanged for the rest of the year.

U.S. Federal Reserve policy makers, who have raised the benchmark overnight lending rate nine times since June 2004 to 3.25 percent, are expected to raise the rate by another quarter- point when they meet Aug. 9, according to all 34 economists surveyed by Bloomberg News. Most expect the rate will reach 4 percent by the end of the year.

Sell Above 77 Cents

``We see a chance the Reserve Bank could cut rates in early 2006 and the Federal Reserve raise rates by more than is priced,'' said John Kyriakopoulos, a currency strategist at National Australia Bank Ltd. in Sydney. ``The Australian dollar's interest-rate advantage will narrow, so sell the Australian dollar above 77 cents.''

A report Aug. 5 will probably show U.S. jobs growth is accelerating, reinforcing expectations of higher Fed rates.

Australian two-year bonds yield 5.24 percent, compared with 4.03 percent for like-dated U.S. Treasury notes. The 1.2 percentage point gap has narrowed from 2.13 percentage points on Feb. 10.

Australian government bonds fell for a third day. The yield on the 6.25 percent bond due in 2015 rose 4 basis points, or 0.04 percentage point, to 5.31 percent. The price fell 0.278 or A$2.78 per A$1,000 face amount, to 107.006. Bond yields move inversely to price.

`Good Reason'

Losses in the Australian dollar may be limited by a rally in the price of commodities the country exports.

``The global growth and commodity story looks a good reason to buy the Australian dollar,'' said Rick Lloyd, head of Group of Seven currency trading at ABN Amro Holding NV in Sydney. The currency will rise to 76.92 cents in the next two days, its 200- day moving average, he said.

The Reuters/Jefferies CRB Index of 19 commodities rose for an eighth day yesterday, gaining 0.9 percent to its highest in 4 1/2 months.

Rising raw material prices such as copper, which reached a record high, bolster the local currency because about 10 percent of the country's economic growth is dependent on commodity exports.

A rally in U.S. stock market indexes to a four-year high is also supportive for the Australian dollar because it demonstrates confidence in global economic growth, said John Horner, a currency strategist at Deutsche Bank AG.

`Pretty Favorable'

``With base metals and equity markets making new highs, the outlook for the currency is pretty favorable in the near-term,'' Sydney-based Horner said. It will rise to 79 cents by year-end, he said.

Australia's dollar initially climbed amid speculation a local gold miner is the takeover target of a European company, bolstering demand for the currency to pay for the acquisition, said Robert Rennie, chief currency strategist at Westpac in Sydney.

Zug, Switzerland based Xstrata Plc may bid for Melbourne- based Oxiana Ltd., the second-biggest Australian gold producer by market value, the Australian Associated Press reported yesterday, citing an analyst it didn't identify.

Demand for the currency was eroded after Oxiana said today it hadn't received a takeover approach, Rennie said.

To contact the reporter on this story: Chris Young in Sydney at cyoung12@bloomberg.net.

Last Updated: August 3, 2005 02:45 EDT